Fund managers set out "substantial differences" between draft laws and regulator advice

The body which represents the interests of the global hedge fund industry has published a paper (39-page / 283KB PDF) which it says shows "substantial differences" between draft regulatory proposals and the advice of the European securities regulator.19 Apr 2012

The Alternative Investment Management Association (AIMA) said that a recently published draft delegated Regulation containing implementation measures for the Alternative Investment Fund Managers Directive (AIFMD) went against the advice of the European Securities and Markets Authority (ESMA).

AIMA chief executive Andrew Baker said that the body had tried not to focus on "mere drafting or technical detail" but rather was highlighting "substantial changes of policy" that would have a major impact on the industry.

"We urge the [European] Commission to follow ESMA's advice, which was published after a very thorough and highly technical process involving representatives of the EU's national regulatory authorities and which we assume is fully in line with the Directive," he said.

He added that while the AIMA "fully respected" the Commission's right to diverge from the regulator's advice, it believed that any changes should be "properly assessed and consulted with the public" before any final decisions were made. AIMA has claimed that the Commission only gave member states two weeks to respond to the new text.

Earlier this week, banking body the European Banking Federation (EBF) said that the draft Regulation "did not provide sufficient legal certainty". It added that the industry "widely agreed upon" ESMA's advice.

The AIFMD, which will take effect from 2013, aims to create a harmonised regulatory structure for alternative investment fund managers across the EU. The new Regulation will make certain 'level 2' measures included in the AIFMD, which must be specified by the European Commission, directly applicable to EU member states without the need for transposition into national law. It has been circulated to national regulators but has not been made public, and is due to take effect in July.

Areas where the new Regulation differs from ESMA's advice include third country provisions, depositaries, delegation, leverage, own funds, professional indemnity insurance, appointment of prime brokers and calculation of the assets under management.

The draft leaves out the advanced approach to calculating leverage that was proposed by ESMA, AIMA said in its report. It instead uses the approach set out in a collection of directives known as the Undertakings for Collective Investment in Transferable Securities (UCITS), which regulate collective investment schemes. The UCITS approach, which states that the total risk exposure of the fund must not exceed 200% of its net asset value, "does not reflect the role of leverage in alternative investment funds and could provide a misleading picture of leverage in the industry," AIMA said.

It is also particularly concerned about "unworkable" proposed restrictions on the use of so-called 'third country' brokers and counterparties, or those based outside the European Union. The new rules would force countries such as the US and Japan to share information on an unqualified and non-reciprocal basis with their European counterparts.

"The draft regulation seems to introduce strong and unqualified obligations for EU authorities to obtain all information and assistance necessary for the performance of their tasks under the AIFMD," the paper said. "Without clarification that such agreements are to be concluded on a best-efforts basis and cannot legally bind the EU and third country competent authorities, the third country regime could become unworkable."

The EBF has already expressed its concerns that the new plans impose a "level of responsibility beyond the reasonable control" of the bank which holds assets on behalf of a fund affected by the new rules, for example a hedge fund or private equity fund. It added that legislative certainty was "crucial" given the level of liability these 'depositary' banks will have.

The AIFMD will apply to any person or company whose regular business is managing one or more alternative investment funds – including hedge funds, private equity funds, real estate funds and a wide variety of other types of institutional fund. Under the AIFMD, that person cannot be authorised to act as an alternative investment fund manager unless it also provides portfolio management and risk management functions.

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